The attraction of this rapidly rising sector to investors of all sizes is the promise of security and consistently high returns.
Global private credit giants are expected to expand their presence in Australia, targeting institutional and individual investors for capital while extending funds to local businesses and real estate projects.
That’s the view of private credit experts, who predict more growth ahead in a sector that is luring investors with high and seemingly reliable returns.
“It may be all the buzz in the market now, but private lending has been around for decades, and debt is inherently more conservative an investment than shares,” says Clayton Utz Partner Alexander Schlosser. “The risk depends on the fund.”
The comments were shared in a private credit white paper titled Investment alternatives: Navigating private credit’s ‘golden age’ published by AFR Intelligence in partnership with La Trobe Financial.
Putting a figure on the size of the Australian private credit market has been a difficult task. The definition of private credit covers anything from a group of wealthy individuals financing a property development to a super fund providing long-term debt to finance a factory of an ASX-listed company. EY says the private lending sector is at $200 billion, which is just 2.5 per cent of outstanding corporate debt.
While private credit has been around for decades, it is experiencing a so-called golden age for two reasons. The first is that a tightening of global capital rules has forced the banks to curtail lending, and in Australia, that has been most acute in the property sector. The second has been a demand among investors for high and reliable income that private credit pitches.
The growth spurt of late has been in specialist private credit funds that raise money from investors in managed investment schemes and build a portfolio of loans to generate income.
The growth of private credit in Australia has been pioneered by funds such as Metrics Credit Partners. Metrics was founded by a trio of former National Australia Bank lenders who established a loan fund. The firm has since expanded to oversee $18 billion and is now a major provider of credit to corporations and property development projects, and has more than $3 billion of assets in ASX-listed funds.
Challenger invests its own balance sheet as well as on a fiduciary basis mainly for institutional investors and IFM Investors – owned by its industry super fund clients, are also well established providers of private credit. Revolution, which was founded by Challenger’s former head of fixed income, is another prominent private credit fund that has attracted funds from investors.
“We’ve had great growth in Australia … and we’ll only get more sophisticated,” says Rodney Sebire, head of alternatives and global fixed income at research consultancy Zenith Investment Partners.
He predicts that more international private credit funds will be set up in Australia to raise money from individuals seeking high and reliable yields.
That trend is already under way. Los Angeles-based private capital giant Ares has loaned billions of dollars to Australian companies while it is attracting capital from individual investors via its managed funds that are primarily exposed to US loans.
Meanwhile, Blue Owl, which is also listed in the US, has made key hires in Australia with a view to targeting the superannuation and wealth sectors with its global credit offerings.
“The way I see it, we’re going to have a lot of global private debt complementing domestic exposures, and there’s plenty of scope for growth,” Sebire says.
Global private credit funds may also join Australian firms by targeting individual investors via ASX-listed investment trusts.
So far, KKR and Pengana offer global private credit exposure on the ASX while Metrics, Qualitas and Gryphon, which is backed by global firm Barings, provide exposure to Australian private credit.
Partners Group had delisted a private credit fund due to lack of market support, while other funds such as PIMCO pulled plans to raise money on the ASX. However, brokers are once again fielding interest from global funds that are considering listings of debt funds.
The attraction of private credit to investors of all sizes is the promise of security and consistently high returns. “You give up liquidity, but you get higher returns,” Sebire says.
The presence of international private credit funds may in turn prompt an increase in disclosure from Australian private credit funds.
“In the US and UK, there’s much more liquidity and regulation,” explains Schlosser. “The private credit market is still relatively unregulated in Australia, and there is no secondary market for resale.”
The Australian Securities and Investments Commission has pledged to increase its surveillance of private credit funds and says it plans to share its findings on the sector by the end of the year.
Increased disclosure and transparency may either slow the growth of private credit or could accelerate it.
“Private credit funds are not banks and have a different function in society, so require a different approach to regulation,” Professor Narine Lalafaryan of the University of Cambridge says.
“The rule of law and regulation should help this asset class grow organically and dynamically, enabling it to stabilise this need for financing.”
